Mind the Gap!
By Page May, Emerson Hunger Fellow, NETWORK Education Program

In a recent review of the book The Spirit Level: Why Greater Equality Makes Societies Stronger, Andrew Bradstock wrote, “…when some live in opulence while others can’t even meet their basic needs, God takes a dim view. Indeed, as biblical archaeology shows, it’s at those times that the prophets speak most urgently.”

If there were ever a time when our nation must listen to the voices of those prophets, this is it.  Most of us are aware that the super-rich own wealth far beyond what anyone needs. In fact, a recent survey conducted by the Public Religion Research Institute revealed that 62% of Americans believe that this concentration of wealth in the hands of the few is one of the biggest problems in this country.

Some would have us believe that this concern is little more than envy or even class warfare, but it is, in fact, a legitimate fear about the direction of our nation. Such an extreme wealth gap – which has grown to historic proportions – affects our health and education systems, the safety and wellbeing of our communities, and our democratic system of governance.

As the super-rich pull away from almost all of us, they take with them some of the foundational principles of our nation. The ability of most people to steer our government toward working for the common good is destroyed when the wealth of a few can be poured into political campaigns to ensure that those elected will represent their interests.  So where do we stand today, and what can we do about it?

The wealth gap

Today, the wealthiest one percent in the U.S. own more than 90% of Americans combined. This elite class controls over 35% of the entire nation’s private wealth. The ratio between the wealthiest 1% and the median American household is the highest on record at 225:1. Moreover, the bottom quintile of Americans have more debt than income and assets.

The wealth gap disproportionately affects people of color and perpetuates economic injustice: In 2011, the median African American household owns less than 10 cents of wealth for every dollar of wealth owned by the median white family.

This gap between the wealthiest and poorest has increased dramatically, particularly since 1979. Our nation is suffering from a level of wealth inequality that has not existed since 1929 just before the Great Depression.

Why you should mind the gap

The amount of wealth someone owns greatly affects that person’s financial stability and access to opportunities- education, health care, ability to start-up a small business, savings, retirement, etc. A large gap in wealth means a large gap in opportunities for families and individuals. Furthermore, wealth offers a means to exercise and acquire more power: Wealth can be used to control industry as a shareholder or executive. Or as a funder of political campaigns, think tanks, research, lobbyists, and propaganda that serve the interests of the wealthy. The more money behind something, the more noise it makes. And that can block out the people and ideas that best serve the common good.

And so, perhaps it is no surprise that over the past 30 years, working-class Americans have had to pay higher healthcare and energy costs, put up with reduced benefits and longer hours, and yet see no significant increase in their actual wages. Or that racism and xenophobia persist in dividing our nation and marginalizing its people. Or that public health is deteriorating, jails are overflowing, social mobility is stagnating, and the government is....

After all, these are issues of power - perpetuated and enforced by the wealth gap. This denies us all opportunities and is inherited by the next generation. The problem is not that wealth is inherently bad or that wealthy people are corrupt or greedy. The problem is that the widening gap translates into a gap in power and opportunity. And this affects everyone negatively, not just the economically marginalized. The gap weakens and erodes our society’s health, well being, and democracy.

Catholic Social Teachings state that each of us has a right to live in dignity and that our government must serve the common good. That means that society has a moral obligation to ensure that all people, especially those living at the economic margins, have access to the necessities of life including food and a safe place in which to raise a family. The extreme wealth inequality plaguing our nation today is inconsistent with these principles.

As Pope Benedict has written, “The dignity of the individual and the demands of justice require, particularly today, that economic choices do not cause disparities in wealth to increase in an excessive and morally unacceptable manner…Economic activity…needs to be directed towards the pursuit of the common good, for which the political community in particular must also take responsibility.”

The U.S. economic recovery from the Great Slump is on life support.  U.S. real GDP is over five percent below its potential.  The official unemployment rate stands at 9.2 percent—14.1 million people actively searching for jobs with no success.  Over six million of them, 44.4 percent, have been unemployed for more than 27 weeks.  Another 2.7 million people, not counted as officially unemployed, want and are available for work but are not searching for work because of specific circumstances or because they are discouraged, i.e., they believe no work is available.  And under-employed workers, those working part-time but desiring full-time work, number 8.6 million.  Counting all the unemployed and those under-employed, the un-cum-underemployment rate is over 15 percent.  The employment-population ratio has again declined to 58.2 percent.  The state and local government sector continues its hemorrhaging.  It is a shameful and very costly waste of labor resources that for many individuals and families will have significant adverse long run consequences for upward mobility and lifetime earnings.  This, of course, is in addition to the lost production that the economy can never again retrieve.  In the midst of all this, we have President Obama and top lawmakers from both parties embroiled in cantankerous and contentious “negotiations” about deficit reduction, fiscal austerity, and the debt ceiling.  Like Nero who fiddled about while Rome burned, they utter nary a word about the stumbling recovery or the worsening unemployment picture.  

Please understand that I realize the U.S. faces critical long run deficit and debt issues that policy makers need to seriously address.  But, to quote from John Maynard Keynes, “…this long run is a misleading guide to current affairs.  In the long run we are all dead.”  I (not necessarily Keynes) use this quote to argue that our legitimate concerns regarding long run economic problems cannot and should not be used as excuses for ignoring very real and very painful short run economic problems.  In my view, shared by a number of others, this economy is in desperate need of further fiscal stimulus and no one in authority has the political will or courage to say so, including the President.  Expansionary monetary policy has run its course.  Short run fiscal expansion is necessary.  This, of course, will mean short run additions to both the deficit and the debt—so be it.  Another extended payroll tax holiday, extended unemployment benefits, further increases in food stamps, and more aid to state and local governments for education, public safety, and infrastructure maintenance are among the kinds of fiscal expansion that would be most effective in generating more economic activity and strengthening labor market conditions.  

Correspondingly, it would be disastrous if an agreement between Democrats and Republicans led to front loaded slashes in federal spending.  Given our current economic circumstances, I find the argument that fiscal austerity would actually be expansionary to be highly dubious.  Indeed, some recent research by Guajardo, et al. (2011) seriously questions whether fiscal austerity has ever been expansionary.  

I am also aware of the argument by some that current unemployment would be much lower if not for the (previous) generous extension of unemployment benefits.  Frankly, although there is some evidence that more generous unemployment benefits increase the duration of unemployment, the evidence itself is not particularly compelling.  A very recent study on this topic by Howell and Azizoglu (2011) demonstrates this for those who want to understand why.

Finally, there is an argument that additional stimulus will not be effective in reducing unemployment because most of the unemployment problem is structural, not cyclical.  Structural unemployment results from the mismatch between the skills offered by the unemployed versus the skills required by new job openings.  Cyclical unemployment, on the other hand, is the result of economic downturn, i.e., the decline in overall economic activity.  The bottom line here is that fiscal expansion will not be very effective in combating structural unemployment.  Again, however, the evidence that most of our unemployment problem is structural is quite thin, especially in light of the most recent report estimating that there are, on average, five applicants for every job vacancy.  Indeed, this suggests that cyclical unemployment due to weak economic activity remains a large part of the unemployment problem.

In a nutshell, here’s my advice to policy makers.  Raise the debt ceiling and engage in additional short run, effectively targeted, fiscal expansion to address the faltering recovery.  Rely on the Simpson-Bowles and Domenici-Rivlin long term deficit reduction proposals as the templates for long run spending reductions and tax reforms, keeping in mind that an effective plan to rein in escalating health care costs is absolutely essential to any long term fiscal solution